Shadow margin loans make a sly return as China stocks sizzle

SINGAPORE/ SHANGHAI: On a cloudy March morning in Shanghai’s glitzy financial district of Lujiazui, Ye Lixia was knocking on the doors of potential clients, offering loans to bet on a surging stock market.

“We provide money to investors who need quick funding to capitalise on the market rally,” Ye told Reuters.

Ye, in her 30s and a general director at Bo Ying Asset Management, is one of the thousands of grey market lenders operating in the shadows of China’s colossal capital markets.

A stock market that shot up 25 per cent in the last three months has revived the undercover margin lending business that was notoriously responsible for China’s 2015 boom-bust market volatility.

In defiance of warnings from the China Securities Regulatory Commission ( CSRC), shadow lenders pitch their business via cold telephone calls and social media advertisements, dangling the prospects of a reversal of fortune.

“In China, speculators adopt very aggressive trading strategies, gaming the rules... and pushing policy-makers’ tolerance to the limit,” said Stephen Huang, vice president of Shanghai See Truth Investment Management Co.

The Shanghai index’s swift recovery from last year’s heavy losses has been primarily driven by signs of an end to the longrunning Sino-US trade war.

Beijing’s efforts to lower the cost of lending in a slowing economy, and foreign investment inf lows after the inclusion of Chinese A- shares in global equity benchmarks encouraged the rally.

Shenzhen’s start- up board ChiNext, traditionally a hotbed for speculation, has surged more than 30 per cent this year.

In the official margin financing market, in which stock investors borrow money from brokerages, outstanding loans have jumped nearly 30 per cent since the end of January to 911.6 billion yuan ( US$ 136.08 billion). That is just a third of the 2.27 trillion yuan record hit in June 2015.

But uno f f icia l ma rg in f inancing, in which smal l investors borrow from grey market lenders, is thriving. — Reuters